Beyond inflation – Brazilian style

With all the recent talk
of
Ben Bernankes new unemployment rate-related and GDP
growth-focused monetary policy mandate for the Federal
Reserve, and comments from soon-to-be Bank of England governor
Mark Carney reinforcing this shift away from myopic
inflation-targeting, it is perhaps worth remembering that in
Brazil the central bank has long looked beyond its official
target of inflation of 4.5% plus or minus two percentage
points. One of the aims of monetary policy has been to reduce
interest rates as a target in itself, to lengthen the terms of
financing within the economy, to spur investment and in turn to
generate GDP growth. The drive to a lower Selic rate was also
crucial, in the governments eyes, to reduce the inflows
of speculative money into the currency and thereby lead to a
lower valuation of the real.

Its harder to
forecast, when there are so many aims for monetary policy
 official and unofficial, but widely known  what
will happen to
Brazilian rates in 2013. There is quite widely expressed
confidence in the country for renewed GDP growth in 2013.
Despite the woeful performance in 2012, when GDP is likely to
have hit an annual growth rate of about 1%, bankers say that
companies across industries are reporting a strong close to the
year. Domestic
Brazilian optimism and confidence are definitely growing,
and there are lessened fears of calamitous external shocks. If
the optimism is correct, the growth will likely lead to an
increase in inflation. Will that, in turn, mean increased
interest rates?

Not necessarily. There is
a minority, but important, school of thought that the
government will throw the capital-controls rule book at any
heat in the economy rather than increase rates. This view
derives from a simple belief that because the
exchange rate is central to the governments economic
strategy, it doesnt want the real going below its current
range of R$2.00 to R$2.10 to the US dollar.

So instead of increasing
interest rates, the IOF taxes on financial operations might be
extended, altered or increased. Industry-specific policies
might be adopted to put brakes on inflation  already seen
in utilities, electricity and oil  with the predictable
negative follow-on effects to companies share prices and
investment levels in those sectors. Altogether, such an
approach will certainly make it harder to predict any financial
policy changes, and might have the unintended (or is that
intended?) consequence of lessening the appeal of Brazil to
investors from abroad.

A country is free to pursue its own economic strategy, of
course, (within reason,
that is, Argentina take note) and Brazil is a great example
of a country that is willing to adapt conventional thinking and
take its own path. It is among those countries that have been
ahead of the curve in its approach to its "beyond inflation"
objectives for monetary policy. But it also shows that while it
is easy to broaden the demands of monetary policy 
its easy to add in employment targets, GDP growth and
even currency valuation to the inflation-targeting mandate
 the follow-through implications tend to be complexity,
uncertainty and, well yes, a little messiness.

Further reading on Euromoney

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